Reverse Mortgages for Older Homeowners
Wednesday, November 12, 2014
In recent years, more and more Canadians are heading toward retirement with very little money in the bank. Many mature Albertans are considering the reverse mortgage as an alternative to selling their homes or extending their time in the workforce.
National Senior Safety Week is a good time to examine the reverse mortgage and its pros and cons to help you determine whether a reverse mortgage makes sense for you.
What Is a reverse mortgage?
A reverse mortgage is a loan intended for homeowners 55 years of age and older. It allows you to access the equity of your home before you actually sell it.
For Canadians over 55, much of what you own fits into two categories: savings, and home equity. Chances are, your home has increased in value over the years and represents a large portion of your net worth. While owning or having equity in a home that has increased in value is beneficial, usually you can’t access any of that equity until you actually sell your home. But what if you don’t want to sell your home just yet?
A reverse mortgage turns your home equity into cash. It allows you to increase the amount of money you have access to by decreasing the equity you have in your home. Basically, with a reverse mortgage you are exchanging a portion of your home equity for cash.
What are the benefits of reverse mortgages?
Now that you know what a reverse mortgage is, let’s talk about the advantages.
- You don’t have to make regular loan payments
- You don’t have to make any payments until you move or sell your home
- You maintain ownership of your home – you will never be forced to sell or move
- You can turn some of the value of your home into cash without actually having to sell it
- The money you borrow is a tax-free source of income
- You decide how you want to receive the money (e.g. lump-sum, planned advances or a combination of both.)
What are the drawbacks of reverse mortgages?
While a reverse mortgage offers certain advantages, it also presents some potential drawbacks. Here’s what you need to know:
- Reverse mortgages are subject to higher interest rates than other types of mortgages
- There are often hidden fees involved with reverse mortgages (e.g. home appraisal fee, application fee, closing fee)
- The equity in your home will decrease as the interest on your reverse mortgage accumulates over time
- The principle and interest will need to be repaid to the lender upon your death, which means there will be less money in your estate to leave to your children and other heirs
Is a reverse mortgage right for you?
A reverse mortgage may make sense for you if you’re:
- Retired or soon-to-be retired
- Concerned that you may not have enough money in the bank to support you
- Have no other means of income such as RRSPs, or a side job
- Mortgage-free or have paid off all or most of your mortgage
The Canadian Home Income Plan (CHIP), created by the HomEquity Bank, is the main source for Reverse Mortgages in Canada. In order to determine whether or not a reverse mortgage is right for you, speak to a CHIP mortgage professional.